1. Field of the Invention
This invention relates generally to systems and methods for improving the quality of liquidity of commodities, such as stocks. Particularly, this invention relates to systems and methods preventing gaming of trading forums in computerized trading and alternative trading systems.
2. Background of the Related Art
The liquidity of a stock refers to the owner's ability to buy or sell that stock without any, or at least with minimal change in value. If a stock is not highly liquid, then the owner may be concerned that selling a large number of shares may depress the price that the stock is sold at.
Maximizing liquidity in the marketplace generally requires a large number of matching offers at matching prices. Thus, if a trader would like to sell 400 shares of XYZ stock at the current price, then that trader would seek out as many contra parties who desire to buy shares of XYZ stock for at least the current price. The difficulty arises in that other traders can vary their trading strategies, and particularly, their pricing strategies, based upon knowledge about trades for particular stock. In this case, when the trader sells all 400 shares in a single transaction, then there is no opportunity for price movement and no liquidity problems can arise. However, if the trader sells only a portion of a total order, say 100 shares, then there is a risk that potential purchasers for the remaining shares will have knowledge about the transaction involving the first 100 shares have just been sold. Such knowledge can be used to “game” a trade. Such gaming is prevalent with electronic trading.
In electronic trading, there are generally two types of executing destinations for electronic orders: displayed and non-displayed. Orders transmitted to a displayed destination are published, i.e., the bids and offers are published to parties that subscribe to the destination. The NYSE, NASDAQ and ECNs (e.g., LAVA, BITS, etc.) are examples of displayed destinations.
In non-displayed destinations, orders are not published, i.e., bids and offers are not displayed to outside parties and therefore, the orders are hidden. Non-displayed destinations, or hidden liquidity pools, are commonly called “dark” destinations or pool. Non-displayed destinations are typically known as Alternative Trading Systems (ATS's) and include Pipeline, ITG POSIT, LIQUIDNET, BIDS and others.
ATS's are attractive destinations for block trading because information leakage is minimized or eliminated when orders are submitted to these non-displayed destinations. Even though non-displayed destinations typically have less available liquidity than displayed destinations, ATS liquidity is extremely valuable to institutional traders due to the minimized information leakage. For example, if a trader wants to buy 1 million shares of a stock and initially sends an order to buy 100,000 shares to a displayed destination, then this order information will be available to all parties subscribing to the market data. Consequently, sellers will now be willing to sell only at much higher prices, thus the stock price will move up. On the other hand if the same order is submitted to an ATS, the information is not available to other traders and the stock price may not move.
Even though ATS's are non-displayed, they can still be vulnerable to gaming because ATS's generally have fewer parties trading than displayed destinations. Thus, there is a need for new and improved systems and methods for preventing gaming in non-displayed trading destinations. Such systems and methods will improve the desirability of non-displayed trading destinations and accordingly, can result in high liquidity and even further decreased risk of gaming in that destination.